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Financial imbalances and cycles: Do they matter for the general public?

From VoxEU by Livio Stracca:

Boom and busts in asset prices and credit and, more generally, ‘financial imbalances’ have been the subject of a lot of public attention in the wake of the global financial crisis and the Eurozone crisis. All major jurisdictions have been establishing macroprudential authorities and there is a lively discussion on whether financial stability should be an objective for central banks alongside price stability. However, nobody seems to have asked the person in the street whether they care about financial imbalances at all.

The ideal way to conduct this analysis would be to design an appropriate survey, where respondents would be asked whether financial stability is a direct source of concern for them. Short of this ideal solution, one can look at proxies of household welfare available in large surveys such as the Eurobarometer survey. One frequently used proxy for household welfare is life satisfaction. In pioneering work published in 2003, Di Tella, MacCulloch and Oswald analyse the impact of macroeconomic variables, such as the unemployment rate, on life satisfaction. However, their analysis is silent on the role of financial variables.

Life satisfactionClearly, life satisfaction is not the only possible measure of household-subjective wellbeing. In particular, it mainly measures the overall attitude towards one's life from a cognitive standpoint, rather than current feelings. However, life satisfaction is closely correlated with other measures of happiness and wellbeing (Graham 2006) and is considered to be a reliable measure by psychologists. It is therefore an interesting variable at least as a first pass in a welfare analysis.

Macroeconomic developments, in particular crises, clearly have an impact on life satisfaction. The chart below reports a measure of ‘net’ life satisfaction at country level derived from the bi-annual Eurobarometer survey, where the measure shown is based on the question ‘On the whole, are you very satisfied, fairly satisfied, not very satisfied, or not at all satisfied with the life you lead?’. In a recent paper (Stracca 2013), I subtract the share of respondents in each country who answer ‘Not very’ and ‘Not at all’ from those who answer ‘Very’ or ‘Fairly’. It is striking that while net life satisfaction has sailed through the crisis practically unchanged in Eurozone low-yield countries, it has plummeted in Eurozone high-yield countries, in particular those who have been subject to an EU/IMF lending program (Portugal, Ireland and Greece). Just to give an idea of the sheer magnitude of the effect, in 2007 in programme countries about 50% more people reported to be satisfied with their life than not satisfied, while the number was about the same in 2012. By contrast, the gap is as high as 80% in low-yield countries.


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